With the venture capital industry slowly recovering from its post-tech wreck tailspin, VCs have begun taking stock of their portfolios and separating the chaff from the gold. Battery Ventures is no exception, but at last blush, the firm certainly seems strong enough to remain a stalwart presence during the current market storm.
Thus far, Battery has backed more than 130 companies worldwide across the communications, software and Internet/e-commerce industries. From its offices in Wellesley, Mass., and San Mateo, Calif., the firm manages over $1.8 billion in committed capital. In addition, its latest billion-dollar fund, closed in 2000, gives the firm more than enough leg room to explore new and emerging technology markets in the U.S., Europe and Israel.
Founded in 1983, Battery has historically yielded profitable returns a little more than 60% of the time, according to the firm. Moreover, for the past two years, the company managed to avoid the fate of several of its VC peers by keeping most of its money out of retail dotcom businesses.
Instead, Battery found a few gems in the immense rock pile of companies out there, including Pixel Works Inc., which designs, develops and markets semiconductors and software for the advanced display industry. The company went public last May at an offering price of $57 a share. Akamai Technologies Inc., which made its Wall Street debut at the end of 1999, provides a global Internet content delivery service.
“These were not fly-by-night candles. They are leaders in their field,” said Scott Tobin, a general partner at Battery. “Whenever you make an investment, you believe in it. I would say more often than not, we have put our money in companies that made sense.”
But not all of Battery’s ventures have panned out as well. Over the course of the past two years, the firm also has built up a cadre of so/so portfolio companies. Although most of its portfolio companies have not yet succumbed to the post-dotcom dog days, it seems more than a few of them have yet to find a sure path to profitability or convince potential customers that they can offer a strong business model.
Take Battery portfolio firm Viewlocity Inc., a provider of enterprise application integration and supply web application software. Sure, the company is still in business, but it just secured $31 million in its sixth private equity infusion and sources say it isn’t close to being in the black anytime soon. For its part, Battery has pumped about $17 million into the company, and any kind of a viable exit still seems a distant reality.
Another example of the portfolio’s stagnation is More Magic Software Inc., which develops software for authentication, authorization and billing over the Internet. The company closed its last round in June with a mere $1.5 million all from Battery. Since More Magic’s inception two years ago, it has raised $48 million in venture financing, and still has yet to coax anything but sour milk out of that cash cow.
Granted, it isn’t unusual these days for venture capitalists to moore their portfolio companies in the metaphorical harbor, choosing to pad their coffers with cash rather than ushering them prematurely into the IPO market’s chilly, volatile waters.
Studs And Duds
Along with a few floundering investments, Battery’s portfolio has its share of duds. Since 1999, the firm has pumped more than $25 million into companies that have since gone out of business. One of its sole dotcom investments, Petstore.com, and Pensare Inc., a provider of distance learning and corporate training over the Internet, are just two of the failed companies scarring Battery’s track record.
Nevertheless, Tobin said he is content with the firm’s overall performance.
“We are satisfied with more than 95% of our investments,” he added in defense of the firm’s decisions. “Like any portfolio, you have winners and losers and we thankfully have more winners than losers.
“We believe, being that the markets have shifted, particular companies find themselves in tough straits and we try to help them out. But at a certain point there is nothing anyone can do to help them. Luckily, we have not been plagued by very many of those.”
While those losers may not wreck a whole portfolio, they could potentially put a dent in Battery’s relationship with the limited partner community, especially those who have been burned in the wake of the Internet feeding frenzy.
However, Tobin said he isn’t worried. “A vast majority of our LPs have been investing in private equity for a long time. They recognize that good times and bad times don’t last forever. Their commitment has not shaken much,” he said.
Perhaps the firm’s ability to raise a billion-dollar fund is a good indication that LPs are still sweet on Battery. To ensure that will be able to get future funding, however, Battery must invest its capital well during these tumultuous times.
Thus far, Battery has poured $106 million into about 20 companies, mostly in the technology and communication sectors. That Battery is still actively making new commitments is commendable, especially given that many other VCs have halted their investing activities altogether.
Although there’s no guarantee that Battery has invested in companies that will ultimately gross better-than-average returns, Tobin said the firm is paying more attention to where it puts its money, especially in a down market.
“We prided ourselves on doing a lot of homework, but now we are going to sharpen our pencils a lot more and be more careful with regard to valuations,” Tobin said.
In addition to the bread-and-butter deals that Battery has been working on, Tobin said that the world can expect more “out-of-the-box” transactions from Battery in the future.
For example, the firm just poured $40 million into the London Futures Exchange. While it’s not a typical investment for the firm, Tobin said it should provide some returns in a “creative way.”
“We’re looking for interesting ways to deploy capital. You may see much larger investments from us than in previous years. We will continue to be plain vanilla Battery but we are adding funky chocolate sauce and cherries,” he said.